According to Fortune, about 75% of employees will be receiving a holiday bonus this year. Now, this is the point in which I am obliged to say, “Why do companies continue to throw good money after bad?” Let me say that I have no problem with performance bonuses properly constructed. The problem is that almost none are. By properly constructed, I refer to the design and implementation of plans that adhere to what the science of behavior (behavior analysis) has discovered about behavior and its consequences.
The problem is that in most end-of-year bonus programs the money is not tied to giving extra effort but is given across the board. The requirement for a bonus is, more times than not, only doing enough to be on the payroll at year’s end.
Giving a bonus to a lazy, disgruntled, or dissatisfied employee does not make him a better performer, less disgruntled, or more satisfied. What it does do is disgruntle the high performers when they see the malcontents get a bonus at all. Although some executives think the bonus will have a positive effect on retention of professionals in high demand, I think it is more likely to fund job searches. If you want an example of how high compensation does not create happy employees, I suggest that you need to look no further than professional sports.
Because money does shape behavior for good or ill, much care should be given to the requirements necessary to earn it. I emphasize the word earn because that should be primary in the decision to award someone a bonus. If bonuses are truly earned by above-and-beyond contributions to the mission, vision, and values of the enterprise, it will be a good investment. Employees will work harder and smarter and enjoy the place where they do it. If it is done across the board or as a defensive measure—to avoid turnover—it is a waste of time and money that will eventually put the organization at risk.
If you want to understand more on this topic, I encourage you to read the book Sin of Wages by Dr. William Abernathy. Or, if you are looking for an article that will shed some light on what you can do differently to set up pay systems that lead to earning discretionary effort from your employees, read Creating a Profit-Focused Workplace.